Apollo Appears Positioned as Winner Under Lightstream Debt Swap

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Lightstream Resources Ltd. is dividing its lenders into winners and losers in a bid to cut debt and survive the oil slump, with U.S. distressed debt giant Apollo Global Management LLC among those who may come out on top.

The Calgary-based oil producer was approached by two investors holding more than half its bonds and agreed to a deal that will reduce debt by about $70 million, lighten its interest burden and bring in new cash, the company’s chief executive said, declining to name the investors.

In return those two large holders got new notes that pay more interest and have a second-lien claim on Lightstream’s assets, above that of other bondholders. Those left out of the private deal got knocked down the capital structure, saw their holdings plunge in trading to about half their original value, and then got downgraded by Moody’s Investors Service on Monday.

“There’d be a lot of bondholders who wouldn’t want this deal but we have the ability to issue new second-lien notes and we have the ability to negotiate private transactions,” John Wright, Lightstream’s chief executive, said in a phone interview Tuesday. “That part shouldn’t be a surprise to anyone.”

Lightstream, which extracts light oil from fields in Saskatchewan and central Alberta, struggled to support its $800 million debt load with oil prices about half of what they were a year ago. They’ve resumed their decline this week, plunging for five straight days to near the lowest in three months and trading as low as $50.91 per barrel today.

Left Out

Public disclosures on who owns Lightstream’s debt covers only about 30 percent of what’s outstanding, but of that number, Fidelity Investments and Apollo are the two biggest holders, according to data compiled by Bloomberg disclosed March 31 by Apollo and April 30 by Fidelity.

Charles Zehren, a spokesman for Apollo with Rubenstein Associates, and Chris Pepper, a spokesman with Fidelity, didn’t respond to emails and phone calls requesting comment.

“This to me seems like someone improving their position and booking a profit at the expense of other holders,” said Geof Marshall, who runs C$11 billion in high yield bonds for CI Investments Inc. in Toronto, and doesn’t hold Lightstream’s debt. “Really, the only thing the other holders have done wrong is they don’t own enough bonds and they’re not organized.”

Holders of the debt left out of the exchange saw their securities plunge to about 50 cents on the dollar yesterday, according to Trace data, pushing their yields to 29 percent. Relative yields on Lightstream bonds have soared above 10 percentage points since October, indicating distress.

Lower Recovery

“We view them as losing and having a much lower recovery level than they would have had before,” said Paresh Chari, the analyst at Moody’s who rates Lightstream.

The debt exchange will see $465 million of the old unsecured bonds canceled out and replaced with $395 million of the new ones secured on collateral in Lightstream. The company will then sell a further $200 million of the new bonds to the same two large investors to inject more cash in the business, according to a company statement from July 2.

In turn, the deal put $335 million of unsecured notes lower down in the pecking order and with less favorable treatment in a bankruptcy, the ratings firm said Monday in a report downgrading the debt to Ca, the second lowest on the scale before default.

Because those who agreed to the exchange are getting less than the face value of their current holdings back, it would only be viable to a firm who bought the debt when it was already discounted, and amassed a large enough position to get the deal done, CI’s Marshall said.

Strange Bedfellows

U.S. money managers Franklin Resources Inc. and Capital Group Cos. orchestrated a similar swap in Fortescue Metals Group Ltd.’s debt two months ago. They climbed up the Australian miner’s capital structure by buying most of $1.1 billion in new debt while more than 200 investors were left to bid for the rest, Bloomberg News reported at the time.

“It’s important as portfolio managers to realize who you’re in bed with,” Marshall said. “A question is, do borrowers pay attention to their lender base and if they think they need extra liquidity would they go to a select group of their lenders that they know can write large tickets?”

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